Prime Contractors: How to Manage Multiple Terminations, Subcontractors, and Settlements

Government contractors facing the termination of multiple contracts at the same time must manage a highly complex and financially risky scenario. The complexity is only heightened with subcontractors and consultants are involved, as it is the prime contractor’s responsibility to pursue settlement packages on their behalf. 

Key items to remember as a prime contractor:

• Multiple contract terminations create significant financial and administrative challenges that require careful tracking of costs, strong internal controls, and expert guidance. 
• Subcontractors can only recover termination costs through the prime contractor, making it the prime’s responsibility to gather, review, and include subcontractor claims in its settlement package.
• A well-supported, auditable settlement package is essential to recovering allowable costs and minimizing disputes with the government. Legal counsel and accounting teams specialized in government contracting are critical to ensuring compliance and maximizing cost recovery. 
• Clear communication and documentation are key to managing subcontractor claims and preparing for government negotiations, as any unsupported or disputed costs could lead to financial losses for both the prime and subcontractors. 

Successfully navigating the challenge of multiple contract terminations involving a network of subcontractors and consultants requires a deep understanding of termination settlement procedures, a well-organized approach to tracking and supporting costs, and a strong team that includes legal counsel and government contract accounting expertise. Without a structured plan, contractors risk leaving recoverable costs on the table, failing to meet audit requirements, and damaging relationships with subcontractors.

Step 1: Capture, organize, and document all costs before and after the termination date, including costs incurred by subcontractors and consultants.

The first step in managing multiple terminations is ensuring that all costs incurred before and after the termination date are properly captured, organized, and documented in a manner that is both auditable and supportable. The settlement package must demonstrate that the costs submitted are reasonable, allowable, and allocable under the Federal Acquisition Regulation (FAR). This is particularly critical when dealing with subcontractors and consultants, as their costs must flow through the prime contractor’s settlement with the government. Unlike a prime contractor, the subcontractors do not have direct recourse to the government for termination settlements. Their only avenue for recovery is through the prime contract, meaning the prime is responsible for reviewing, validating, and including subcontractor claims in its own settlement proposal.

Step 2: Review and substantiate subcontractor costs to eliminate discrepancies

One of the most challenging aspects of this process is obtaining and reviewing the subcontractor costs. Since subcontractors only submit their claims to the prime, they will often provide “unsanitized” cost data, including direct labor rates, overhead allocations, and profit calculations. The prime contractor must carefully analyze this information to ensure that all costs are allowable and reasonable while also preparing a strong case for reimbursement under the prime contract. Any discrepancies or unsubstantiated costs could create risks during government review, leading to disallowed costs and financial losses for both the prime and its subcontractors. Clear communication and transparency with subcontractors are essential, as delays in gathering this information can slow down the entire settlement process.

Step 3: Rely on legal counsel and accounting advisors with government contracting experience

Negotiations with the government over reimbursement will be complex and will require a strong and defensible settlement proposal. A dual approach leveraging legal counsel and an accounting advisor, both specialized in government contracting, can ensure that all financial, compliance, and contractual obligations are handled with precision. Legal counsel will provide critical assistance in interpreting contract clauses, negotiating with the government, and ensuring the prime contractor’s rights are protected throughout the settlement process. An accounting advisor specialized in government contracting can help to properly track incurred costs, prepare documentation, and develop the final termination settlement invoice. 

The bottom line

The risk of losing out on legitimate recoverable costs is high. Prime contractors must be diligent in their cost submissions, maintain strong internal controls, and work proactively with subcontractors to ensure all costs are fully supported. Primes must also be prepared for negotiations with the government contracting officer, who may challenge certain costs or require further justification before approving a final settlement. 

Primes that take a proactive approach, ensure proper documentation, engage experienced advisors, and maintain transparency with subcontractors will be in the strongest position to recover allowable costs and minimize financial risk.

Navigating terminations, claims, and settlement packages can be complex, but you don’t have to do it alone. Aprio’s Government Contracting and Nonprofit teams are here to guide you every step of the way. Whether you need support with claims work, termination settlements, or strategic planning, we’re ready to help. 

Connect with an Aprio team member.  

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